Jersey and Isle of Man face changes to tax regime

Jersey and the Isle of Man's corporate tax regimes face being overhauled after
an EU investigation deemed elements of them "harmful".

Jersey and the Isle of Man's Zero-10 tax policy ensures that only companies owned by Jersey and Isle of Man residents are taxedPhoto: Branislav Senic / Alamy

By Sean O'Hare

6:02PM GMT 11 Feb 2011

The European Union Council’s High Level Working Party met to consider Jersey and the Isle of Man's zero-ten corporate tax policies and reported that they "give rise to harmful effects".

The EU Code of Conduct Group will now meet on February 17 to formally assess the tax measures in light of the findings.

Director of Tax Research LLP, Richard Murphy, said: "The truth is that, as I have heard from at least one high level insider in Jersey, they are utterly terrified by the consequences of this decision and have not a clue what to do about it.

"They know that this decision knocks their whole finance industry into touch and they’re scared stiff as a result."

The zero-ten policy ensures that only companies owned by Jersey and Isle of Man residents are taxed while companies owned by those who are non-resident are, in the main, not taxed. It was implemented with the aim of protecting domestic tax revenues and growing the islands' financial services industries by attracting overseas companies.

It was this discriminatory aspect of the policy, referred to as "deemed dividend" that led the UK to withdraw its backing for zero-ten and for Guernsey to immediately agree to change its tax structure. Jersey and the Isle of Man, however stuck with it.

The Jersey Treasury and Resources Minister, Senator Philip Ozouf, commented: "Over the coming weeks we will be considering all of the appropriate options for Jersey and will announce a course of action once this process is complete.

"There is an isolated problem with the zero-ten about this deemed dividend and we will resolve it.

"I think if we are successful in dealing with that, certainly in my view, zero-ten is likely to continue to be the right corporate tax regime."

With Jersey burdened by a £100 million fiscal black hole and the Isle of Man faring little better due to its shortfall in VAT income, quite how they intend to generate revenue should they abolish zero-ten awaits to be seen.

Mr Murphy added: "These islands could withdraw co-operation with the UK and the EU. This will trigger a constitutional crisis with the UK, but that can’t be ruled out.

"There has also been talk of territorial tax but I don't see this as an easy option."